12 December 2009
Co. A starts marine repair business with purchas of floating dock and construction of workshop. For the purpose of purchasing the folating dock and constructing the workshop, it obtains bank financing. Now there are following expenses which Co.A has incurred towards getting the bank financiand and disbursement of loan: 1. Bank commission for processing loan 2. Agreement drafting fees paid to lawyers 3. Travel and hotel expenses of bank personnels while sanctioning loan. 4. Expenses reimbursement to bank personnel 5. Penal interest for not availing the loan facility 7. Adminstrative expenses by bank. 6. interest on loan availed upto the capitalisation of asset.
Co. A wants to capitalise all the above expenses. Pl. comment whether the above expneses can be capitalised with the assets. Pl. give reference of Accounting standards.
18 July 2024
In accounting, the treatment of expenses incurred in relation to acquiring or constructing assets, such as a floating dock and workshop, is governed by certain principles under accounting standards. Let's address each type of expense and whether they can be capitalized as part of the cost of the asset:
### 1. Bank Commission for Processing Loan - **Treatment**: Generally, bank commission paid for processing a loan is considered as a part of the cost of borrowing rather than the cost of the asset itself. Therefore, it is usually not capitalized as part of the asset. - **Reference**: According to Accounting Standard (AS) 16 - "Borrowing Costs", only interest on borrowings specifically taken to finance the construction or acquisition of qualifying assets can be capitalized, not the costs related to obtaining the loan itself.
### 2. Agreement Drafting Fees Paid to Lawyers - **Treatment**: Legal fees paid directly related to the acquisition or construction of the asset can be capitalized. Since the fees are directly attributable to the asset's acquisition, they form part of its cost. - **Reference**: AS 10 - "Accounting for Fixed Assets" allows for legal costs that are directly attributable to the acquisition or construction of an asset to be capitalized.
### 3. Travel and Hotel Expenses of Bank Personnel - **Treatment**: Travel and hotel expenses incurred by bank personnel are typically not capitalized as they are considered to be general administrative expenses of the bank, not directly related to the asset's acquisition or construction. - **Reference**: AS 10 does not provide for capitalization of general administrative expenses.
### 4. Expenses Reimbursement to Bank Personnel - **Treatment**: Similar to travel and hotel expenses, reimbursements to bank personnel are typically treated as administrative expenses and are not capitalized. - **Reference**: AS 10 does not permit capitalization of administrative expenses.
### 5. Penal Interest for Not Availing the Loan Facility - **Treatment**: Penal interest is usually not capitalized as it is considered a cost related to a missed opportunity rather than directly attributable to the asset's acquisition or construction. - **Reference**: AS 16 - "Borrowing Costs" does not allow for capitalization of penal interest.
### 6. Administrative Expenses by Bank - **Treatment**: Administrative expenses of the bank are not capitalized as they are not directly related to the acquisition or construction of the asset. - **Reference**: AS 10 does not permit capitalization of general administrative expenses.
### 7. Interest on Loan Availed up to the Capitalization of Asset - **Treatment**: Interest on loans specifically taken to finance the construction or acquisition of qualifying assets can be capitalized under AS 16 - "Borrowing Costs". This is subject to certain conditions and can only be capitalized until the asset is ready for its intended use or sale. - **Reference**: AS 16 provides detailed guidelines on capitalization of borrowing costs incurred during the construction or acquisition of qualifying assets.
### Insurance Charges Paid for the Asset Before Capitalization - **Treatment**: Insurance charges directly related to protecting the asset during its construction or acquisition period can be capitalized as part of the asset's cost. - **Reference**: AS 10 allows for insurance costs incurred during the construction or acquisition phase to be capitalized.
### Conclusion Based on the principles outlined in Accounting Standards (AS 10 and AS 16), expenses directly attributable to the acquisition or construction of an asset can be capitalized. This includes legal fees directly related to drafting agreements and insurance charges during the asset's construction period. However, general administrative expenses, travel expenses, bank commission for loan processing, reimbursements to bank personnel, penal interest, and other administrative expenses of the bank are typically not capitalized as they are not directly related to the asset's acquisition or construction.
For accurate application and compliance with accounting standards, it is advisable to consult with a qualified accountant or financial advisor who can review your specific circumstances and ensure proper treatment of these expenses in your company's financial statements.
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